A boost in both Fonterra’s latest and projected milk payouts, announced two weeks ago, is expected to inject more than $2 billion into the economy over two years, moving Reserve Bank Governor Alan Bollard today to label it a price “shock”.

This combined with expectations that world dairy prices will remain high for 18 months has placed farmers' spending intentions up there with big borrowing consumers and homeowners on the Reserve Bank’s inflation anxiety list.

The bank cited the risk from “remarkable” increases in dairy returns among the reasons it hiked interest rates for the third time in three months today, when it set the official cash rate at a record 8 percent.

It also adjusted upwards its GDP and inflation forecasts since its last quarterly monetary policy statement in March, and devoted sections of the document analysing the potential impact of dairy prices on the economy.

Source: newswire.co.nz